The rush by investors had all the hallmarks of a bond market panic. When the U.K. voted on June 23 to leave the European Union, yields on the benchmark 10-year Treasury note plunged to a record low of 1.32%. Yet fear that the EU will unravel was not the only impulse driving investors. Opportunism also fueled much of the buying—the yield on investment-grade corporate bonds fell more than the yield for Treasuries. Investors today hunger for yield as interest rates worldwide sink toward or below zero. Their craving has belied longstanding predictions that the end to the 30-year bull market in fixedincome securities is imminent. In fact, investment-grade bonds rose 5.9% during the year ended July 31, according to the Barclays Aggregate Bond Index, outperforming other major asset classes including equities in both developed nations and emerging markets. Given that this trend is both unpredictable and unprecedented, we are maintaining our focus on buying bonds through a bottom-up analysis of each security rather than on a top-down forecast on the direction of interest rates. Recent history suggests that interest rates should not be so low. The outlook for the U.S. economy is brighter today than in 2009, when 10-year Treasuries hovered around 3.2%. Unlike in 2011—2012, Greece is not on the verge of default and a handful of European countries do not require bailouts. Moreover, the Federal Reserve is not artificially pushing down interest rates by purchasing securities. The central bank bought $4.5 trillion in assets from 2008 until 2014 in an effort to spur borrowing and revive growth. Since the end of the Fed’s so-called quantitative easing, however, weakening global demand has prompted a steady slide in interest rates, with some yields in Japan and continental Europe falling below zero. The start of bond purchase programs by the Bank of Japan, European Central Bank and Bank of England (BOE) has reinforced the decline. The BOE in August, attempting to avert a post-Brexit recession, announced a cut to its main interest rate and plans to buy corporate and government bonds. BOE policymakers expect to reduce the rate again later this year. Capital flows since the Brexit vote have highlighted that the U.S. offers one of the only large, liquid bond markets with positive yields spanning a variety of maturities and credit qualities. With the outlook for interest rates so cloudy, we have outperformed by concentrating on the characteristics of individual bonds. We look for corporate, municipal or securitized debt with mispriced risk—allowing us to gain when the price corrects. Here are some examples: In March, we bought bonds issued by Campbell Soup, a 146-year-old company with solid cash flow but limited avenues for growth. Campbell bonds had declined excessively amid weakness in the corporate bond market. Investors had also overestimated its credit risk. We would have been satisfied to simply earn its 2.8% yield, but when the credit premium for Campbell bonds fell, along with general interest rates, we generated a solid gain. So too was the case with Micron Technology, one of the three top producers of memory semiconductors used in servers, tablets and smartphones. We purchased Micron bonds in June 2016, confident that investors had overestimated its default risk because of expectations that excessive supply would keep down the price of semiconductors for an extended period. In our view, Micron holds enough liquidity and generates sufficient free cash flow to weather the cyclical slump. Once the oversupply dries up, we believe our Micron debt will perform especially well. The mispricing of default risk can provide opportunity regardless of whether the company in question makes chicken noodle soup or the neural network for advanced electronics. Especially in times when predicting the direction for interest rates is particularly ill-advised, there is steady income and upside potential to be made in bonds with unappreciated potential. The views expressed are those of the authors and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested. In addition, these views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients or other clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients and is for informational purposes only. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. This communication and any accompanying documents are confidential and privileged. They are intended for the sole use of the addressee. 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